WorldCom in late talks with debtors

CLINTON, Miss. (CBS.MW) -- WorldCom was locked in last-ditch talks with its debtors ahead of what could be the biggest U.S. bankruptcy ever.

The cash-strapped telecommunications giant reportedly could file for Chapter 11 protection as soon as Monday.

On Saturday, Reuters quoted sources close to the talks as saying there would be no pre-arranged deal with bondholders. Several dozen companies that hold about $28 billion in WorldCom paper had been hoping to convert that debt into an equity stake in a newly capitalized WorldCom.

Recent speculation has centered on banks providing WorldCom with "debtor-in-possession" financing while executives try to work out a prepackaged bankruptcy filing with the bondholders of $28 billion in company debt.

Without a preset bankruptcy deal, banks would jump to first in line among WorldCom creditors, giving bondholders incentive to strike a quick deal to reduce the chance of an outright WorldCom failure. Right now, banks and bondholders would have equal weight in a bankruptcy proceeding.

WorldCom claimed about $103.8 billion in assets at the end of the first quarter, though analysts believe the company's value is only a fraction of that. On that basis, a WorldCom filing would surpass last year's $63.4 billion Enron failure.

In the past week, WorldCom Chief Executive John Sidgmore has indicated time was running out and that bankruptcy might be unavoidable.

Meanwhile, the company has been working to line up financing to sustain operations during a bankruptcy proceeding.

Since WorldCom confessed last month to hiding $3.85 billion in expenses, its cash reserves have evaporated quickly. Bank lenders nullified one backup loan and sued for the return of another $2.65 billion credit line.

At the same time, nervous WorldCom's suppliers have demanded upfront payment, adding further strain to the company's precarious finances.

Asked about the report, company spokeswoman Julie Moore said: "We're declining to comment on speculation."

Shares of WorldCom
WCOME
slipped 3 cents to 6 cents in Friday action. Most analysts have been expecting WorldCom to end up in bankruptcy court, which could render those shares worthless. Several years ago, the stock traded as high as $64.

Still, analysts say it's highly unlikely the company would be forced to shut down its network, which caters to 20 million American consumers and carries as much as half of all the world's Internet traffic. As a last resort, federal regulators or even the Congress could step in.

If WorldCom manages to find accord with its debtors, it might be able to start fresh or present a more compelling takeover target for a healthier phone company, such as one of the Baby Bells.

For now, many Washington lawmakers are loath to accept the sale of WorldCom to a Baby Bell. Such a deal would need government permission, but Congress would view it as a major setback to landmark legislation six years ago aimed at promoting competition in the phone industry.

Earlier this week, several influential lawmakers criticized Federal Communications Commission Chairman Michael Powell after he suggested that a Baby Bell might have to be allowed to buy WorldCom to ensure the survival of its network.

"We do not believe the present economic difficulties in certain segments of the industry justify a relaxation of carefully established principles against combining local and long distance phone companies, nor do we believe such consolidation furthers the goals of the 1996 Telecom Act," wrote Sens. Herb Kohl, D-Wis., and Mike DeWine, R-Ohio.

Kohl is chairman of a key Senate antitrust committee. DeWine is the ranking Republican.

The Baby Bells, for their part, are unwilling to pay a hefty price for WorldCom and want to be shielded from any legal liabilities. WorldCom is facing an array of shareholder and other lawsuits charging the company with fraud.

The company is restating financial results to erase reported profits over the past five quarters. Investigators hint that the restatement could increase as more accounting irregularities come to light.

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